Investment BankingTechnical Interview Workshop

Presented by:Jessica Delfino

With contributions by Mike Hudgin & Ekaterina Petrovitch

Introduction

Jessica DelfinoHighlights ProducerNBC Sports, Paris, London, Los Angeles, New Yorkjessicadelfino9@gmail.com

Agenda

• Interview Format• Valuation

▫ DCF▫ Public Comparables▫ Precedent Transactions

• Sample Technical Questions• General Interviewing Tips

Interview Format

• First Round• 30-45 minutes• Behavioural and lots of technical• One to six interviewers

• Second Round• 3-4 hours• Expect even more technical (reactions under

fatigue/pressure)• One, two, or panel interviewers

How would you value a company?

Three General Ways to Value a Company:

1) Discounted Cash Flow2) Public Comparables Analysis (Relative

Valuation)3) Precedent Transaction Multiples + ratios

For each method, interviewees should address:

• Basic overview (why this method is used)• How it’s practically used (mechanics)• Pros & cons of method

DCF – Overview

• DCF is the method of valuation that allows for the most flexibility (and possibly precision) in coming up with the intrinsic value of a firm▫ The DCF method that we use is FCFF (you might

know it as WACC method, but refrain from calling it this…)

• Mapped on many assumptions• Based on future expectations of a firm’s cash

flows (numerator), and the risks associated with those cash flows (denominator)

DCF – Basic Steps

• First determine WACC = D/V * Rd (1-T) + E/V * Re

▫ Effect of capital structure Use target (optimal) D/E ratio Beta CAPM Rd (1-T) discuss importance of tax shield

• Mechanics of FCFF ▫ FCFF = EBIT(1-T) – CAPEX + NCC +- Δ NWC

Explain that CAPEX and NWC are all cash sources/uses that don’t affect EBIT, therefore we must adjust.

• Analyze historical performance to come up with future set of assumptions (COGS, SG&A, R&D, “DEP”, “CAPEX”, “NWC” as a % sales)▫ Therefore, we need to use revenue as a driver, and

determine its growth from year to year during our explicit forecast period (5-10 yrs)

DCF – Basic Steps (cont’d)

• Determine FCFF’s each year using assumptions driven off of revenue

• Determine TV at last year of forecast period▫ 2 methods

Growing perpetuity ▫ Assumes constant growth rate (2-3%) – not really used

Terminal multiple▫ Assumes an exit multiple of an operating metric like

EBITDA or FCFF, to determine a value for the enterprise at that point in time

• Bring everything back to present value at WACC

DCF – Basic Steps (cont’d)

• Now we have the value of the enterprise (Enterprise Value = Net Debt + Equity + Minority Interest)

• In order to determine Equity value, we must first subtract Net Debt & Minority Interest

• At this point we have Equity Value ▫ Divide by Shares Outstanding to obtain PPS

• Sensitivity analysis provides for flexibility in model▫ WACC / Growth Rates / Terminal Multiples

Too many assumptions• The model only as good as your assumptions

Allows for flexibility• Firm can improve margins over time• Industry outlook can change, and DCF model can

reflect that

DCF – Pros & Cons

Public Market Comparables (Relative Valuation) – Overview

• Relative Valuation is a reality check to see how investors in the marketplace are valuing similar companies like the one in question

• Public Market Comparables (EV/Sales, EV/EBITDA, P/E) are used to determine typical public market valuation with respect to certain operating metrics

Relative Valuation – Basic Steps

• Determine the target company’s EPS, EBITDA, or Sales for current year and possibly forward year (using analyst estimates) ▫ Always use recurring income

• Determine the set of comparable companies (comp universe) and their trading multiples (based on recurring figures!)▫ Similar companies based on industry, size, business

model, risk, capital structure – anything you can control for

• Multiply average industry multiple by current or forward performance to determine the relative value of the firm

Stock prices are determined by relative values Don’t have to make assumptions that are

necessary for DCFNot a gauge of intrinsic value

• Only values companies if they were valued the same way as their peers

Often difficult to find exact comparables • Can use sum-of-the-parts valuation, which is a

weighted-average of each division under specific industry multiples

Relative Valuation – Pros & Cons

Precedent Transactions – Overview

• Value of a company if it were to be taken over by another company (i.e. take-out value)

• Precedent transaction values should always yield higher values than relative valuation▫ Historical take-over premiums are 20-30%

• Not relevant if company is under some scenarios (company is family-controlled and not looking to sell, etc.)

Precedent Transactions – Basic Steps

• Find historical take-overs in industry ▫ Again, look for similar size if possible, and most recent

first• Try to cover at least on economic cycle in terms of

precedent transactions, as some take-over premiums might reflect a take-over boom in an industry

• Multiply relevant multiple (P/E, EV/EBITDA, EV/Sales, etc.) by company’s figure to obtain firm’s value in event of a take-over

Often very relevant, especially for undervalued firms

Often used when firm is selling off a divisionOnly useful if firm will consider takeoverPrecedent transaction values are often higher

than intrinsic value (reflect over-payment in precedent transactions)

Precedent Transactions – Pros & Cons

Current Events

• Interest in Finance will be tested during the interview

• Be prepared to discuss current events that you are following and able to respond to questions

• Case: Bank of America (BAC) deal to acquire Merrill Lynch & Co., Inc. (MER) [September 2008]

• Case: Fannie Mae (FMN) and Freddie Mac (FRE) [September 2008]

• Case: American International Group (AIG) [September 2008]

Sample Technical Questions

• If a company with a higher P/E acquires a company with a lower P/E, is this an accretive or dilutive merger?

• Why would an acquirer be willing to pay a premium to the current trading price?

• What method of valuation would result in the highest value?

• What is minority interest?• Can you walk me through a cash flow statement?

General Interviewing Tips

• Take the time to think about the question before you answer it• The last thing you want to do is go on a tangent or talk too much

• If you don’t know the answer right away, walk through your logical thinking process

• Always try to work out the problem. Don’t say I don’t know!!• Don’t stress & keep your cool• Be confident & comfortable• Always have questions to ask them• Don’t be cocky or pretend like you know everything about banking.

Bankers, especially analysts, find this extremely aggravating and can see through it

• Don’t forget to e-mail them after your interview and thank them for their time

General Interviewing Tips (cont’d)

Tell me about yourself …

• Have a story (1-2 minutes)• Logical flow• Progression• For everything you did, explain why (i.e. I chose business

school because I’ve always been fascinated about what makes a good business)

• Be convincing that I-banking is what you want

General Interviewing Tips (cont’d)

Why I-banking?

• Many good answers• Suggestions

• Being able to learn a boatload in a short amount of time• Being surrounded by intelligent people willing to teach• Interest in financial markets• Like to work on projects and see rewarding results (even see

it in the paper …)• Intense environment, fast-paced, pressure• Anything else that suits you …

Resources

• CC website: Vault Guide to Finance Interviews▫ http://www.mcgill.ca/management/career

• Damodaran online: more material on valuation▫ http://pages.stern.nyu.edu/~adamodar/

• News: Wall Street Journal, Bloomberg, Financial Times, etc.